WSO Top Technical Questions

Question 1

How would you gauge how attractive an industry is?

Answer 1

• The most important measures are growth rate, stability and profitability
• The most attractive industries are stable / predictable, high growth and high profitability
• Good opportunities can exist in unattractive industries if Company has a strong competitive advantage / differentiated business model
• Unattractive companies in unattractive industries can make good investments at right price / remedy what ails them

Question 2

Gauging Stability

Answer 2

• determine growth drivers and examine performance over a few business cycles
• What do the growth drivers depend on?
• is it a Durable / staple or a discretionary / luxury item?
• commoditized vs. differentiated?

Question 3

Gauging Profitability

Answer 3

• identify historical profit margins of industry participants and use 5 forces framework to know if industry-wide margins are likely to shrink, grow or remain steady

Question 4

What are the components of the 5 forces framework?

Answer 4

• Bargaining power of suppliers
• Bargaining power of customers
• Threat from new entrants
• Threat from substitute products
• Existing competitive rivalry

Question 5

Bargaining power of suppliers

Answer 5

• relative level of consolidation between industry participants and industry suppliers frequent determines which side is likely to capture the most profits
• more vs. less consolidation is usually a good sign for profitability

Question 6

Bargaining power of customers

Answer 6

• if industry participants are more consolidate than their customers, it’s a good sign for profitability

Question 7

Threat from new entrants

Answer 7

• look for strong barriers to entry
• essential / exclusive intellectual property, high fixed capital investment requirements, high minimum efficient scale thresholds, high value placed on brand and existing relationships

Question 8

Gauging growth rate

Answer 8

• industry reports or aggregate revenue growth rates from participant companies
• determine primary drivers of historical growth

Question 9

5 key ways to gauge / evaluate a company’s competitive positioning?

Answer 9

• Market share
• Profit margins
• Brand perception
• Product breadth & quality
• Management team quality

Question 10

Other helpful ways to gauge a company’s competitive strength

Answer 10

• low cost product / service delivery model
• strong intellectual property
• low levels of customer churn (high customer retention rate)
• diversified customer and supplier base
• diversified revenue sources
• high levels of recurring revenue

Question 11

What might cause two companies with identical financial statements to be valued differently?

Answer 11

• at a high level, what don’t the financial statements tell us?
• the future growth of the company’s industry
• the company’s competitive positioning; share, relationships, patents
• reputation and capabilities of management team
• quality of company’s future strategy

Question 12

In what ways do PE sponsors generate returns?

Answer 12

• Price: Entry and Exit Multiple
• Dividend Recaps
• Financing Engineering: Debt / Leverage
• Operations

Question 13

What are some of the operational methods PE firms use?

Answer 13

• Management
• Incentives
• M&A
• Cut costs
• Restructure / Turnaround
• Professionalize a family or small business
• Drive synergies between portfolio companies

Question 14

What are the 4 phases of the industry life cycle?

Answer 14

• Introduction
• Growth
• Maturity
• Decline